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Directions: 1. Draw the decision tree needed to solve the problem on a long bond paper. This should be handwritten. 2. Show all the necessary
Directions: 1. Draw the decision tree needed to solve the problem on a long bond paper. This should be handwritten. 2. Show all the necessary solution including the computation for the nodes. This can be presented on a separate bond paper. Problem Monica is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable. Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favorable market, Monica can expect to make $90,000 from the large facility or $60,000 from the smaller facility. Vf the market is unfavorable, however, Monica estimates that she would lose $30,000 with a large facility, and she would lose only $20,000 with the small facility. Because of the expense involved in developing the initial molds and acquiring the necessary equipment to produce fiberglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her $10,000. Furthermore, the pilot study can be either favorable or unfavorable. Monica estimates that the probability of a favorable market given a favorable pilot study is 0.8. The probability of an unfavorable market given an unfavorable pilot study result is estimated to be 0.9. Monica feels that there is a 0.65 chance that the pilot study will be favorable. Of course, Monica could bypass the pilot study and simply make the decision as to whether to build a large facility, small facility or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favorable market is 0.6. What do you recommend? Compute the EVSI
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